Should You Put Your Properties in a Limited Company?
Tax is always a big one. So could landlords save on tax by incorporating into a limited company
Becoming a landlord is a big step. Finding the perfect property, taking the plunge, getting your head around all the legal requirements, that’s all before you’ve found a tenant.
However, once you’ve got to that stage, and everything is ticking over nicely, you might start to wonder whether your blossoming property empire is in the correct company format to make the most of the tax options.
With limited companies a popular option for many landlords, we’ve gathered together a team of experts to shed some light on this complex process.
In this episode:
- We’re joined by chartered accountant and chartered tax advisor Richard Cunningham, who gives us the low-down on limited companies, and whether they have limited appeal
- He talks through the tax ramifications, the admin requirements, and how to plan your future finances
- Property Tribes’ Vanessa Warwick answers your questions on damages, fair wear and tear and gives her predictions for the future of the industry
- Mashroom’s Emi Steadman talks us through the latest options for protecting your assets, and how it could benefit you and your tenants
Landlord limited company options
Moving from a sole trader to a formal business structure sounds like a very grown-up step, and for many landlords seems like a complex option. Lots more paperwork, more admin, more risk.
But is this really the case, are we missing a trick?
We asked Richard to talk us through moving to a limited company structure, one of the most common options chosen by landlords, and the benefits:
A limited company is a separate legal entity, with limited liability. The shareholders liability is limited to the share capital that they actually put into the company that requires a director to run and to operate it, and it’s that protection that provides comfort.
Richard goes on: ‘There’s some big upsides to that. Potentially, the first one is low tax rates. Corporate rates are lower than personal income tax rates. So, at the moment, you’re looking at 19% of your corporate rates. They are actually going up to 25%. But the first £50,000 will be 19%. Thereafter, there’s a kind of marginal relief up to £250,000 after which you’re into 25%’.
One of the big advantages is that you’re only subject to income tax to the extent that profits are actually drawn from the business, this creates an advantage particularly where you’re highly geared. So you’ve got a big mortgage, large capital repayments.’
Landlord Limited Companies: The Cons
So that all sounds like a no-brainer, right? Saving huge chunks of taxable profit? Well, hold on, let’s just see if there are any cons…
‘There are potential adverse tax consequences of doing so’, warned Richard. ‘The transfer of your properties into the company is a taxable event for capital gains tax’.
Let’s say you’ve got a million quid’s worth of property. You transfer them in – they cost you half a million quid. You’ve got a capital gain of half a million pounds so that point of transfer, you’re going to have to pay potentially 28% on that half a million pounds, within 28 days.
Landlord Tax Relief
There are tax reliefs for both capital gains tax, and stamp duty, but like anything worth having, they’re not easy to come by…
‘For capital gains tax, there’s something called incorporation relief, which enables you to effectively defer the gain that would normally arise into the value of the shares that are being issued to you. You’re effectively holding over that gain to a future event, which would normally be a sale of those shares.’
‘The challenge is you have IS there are a number of hoops that you have to jump through to benefit from incorporation relief. You’ve got to be carrying on what’s termed a business, and the revenue can be kind of tight in terms of ensuring you meet those requirements. And you’ve got to be an active landlord.’
If you’re a landlord with three or four properties and you’ve got an agent manage them for you, it’s very much passive income, so you’re unlikely to benefit from incorporation relief.
‘On the stamp duty side, there are other reliefs too. If you are holding your portfolio in a partnership and you transfer into a limited company, essentially in simple terms, the ownership structure of the partnership mirrors the ownership structure of the limited company, then there is a relief from stamp duty – but it has to be a true partnership. And most people don’t carry on their letting businesses as a partnership.’
What legal responsibilities are involved?
So that covers the pros and cons. But what of the admin side of things? Is a limited company a huge amount of work?
‘You’ve got to act in the best interest of the company and if you have other shareholders, you’ve got to be very careful around things like conflict of interest,’ explained Richard. ‘It’s not to be taken lightly. If you’re going to go down this route, you need to educate yourself.’
‘There are a lot more responsibilities, and if you fail in your responsibilities, it gets expensive. You need to have an accountant. You really do, the rules are changing all the time. You need to engage someone who’s got their finger on the pulse.’
Best options for landlord expansion
If you’re looking to invest in new properties in the coming years and grow your portfolio, are there any particularly good options for structuring your business to get the best bang for your buck?
‘There’s nothing to stop you from setting up a new limited company, and buying your property through that limited company’, explained Richard.
‘There are pros when you’re setting up from scratch, from income tax purposes to for inheritance tax purposes. With income tax, often when people set up a limited company, it’s often husband and wife or partners, and they’ll just issue two shares to normal shares. You have a share, your partner has a share and income is distributed equally’.
But it’s often not the case that both partners pay the same rates of income tax. Your partner might be a higher rate taxpayer, you might be a basic rate taxpayer. If you’re the basic rate taxpayer, you really want to be taking more of the income, because you’re going to pay basic rates. The great thing about shares in limited companies is what’s called the Articles of Association – you can vary the rights of those shares.’
‘This requires advice though,’ laughs Richard. ‘You’re going to need a tax advisor, you’re going to need a lawyer as part of the setup as well.’
Property is a long-term investment as we all know, and if we’re looking really long term (hopefully!), inheritance tax is something that we should consider. How does this sit within a limited company?
‘If you start you set up your limited company and you give shares to your next of kin, you potentially have the same issue on triggering tax charges’, admits Richard. ‘BUT there are various little tricks that you can use to help reduce future inheritance tax exposure.’
‘For example, you set up a company, and there’s a million pounds of property in there, but there’s also £500,000 of debt against it. You get hit by a bus tomorrow, and that company is going to be valued at half a million pounds for the purposes of your estate.’
‘What you could do (before you get hit by the bus!) is issue some shares to your next of kin – to your kids, grandkids or whoever it may be – and give them the right to future growth. At the point at which you give them shares, they’ve got no value. But you’re freezing the value of your interest in the company at that point, you say about half a million quid. Anything over that value. When you sadly pass away, if your asset value has grown and you’ve got two million quid’s worth of property in the portfolio and half a million quid’s worth of debt, in theory, the value of your estate is 1.5 million pounds. But it isn’t. It’s actually the original 500,000 pounds at the point at which you issued growth shares and effectively froze the value of your interests and rights.’
Is incorporating worth it for landlords?
Whilst it will be different for everyone, on balance, do you think limited companies are a good option for landlords today, or are they still a lot of work for not a lot of gain?
‘Take advice, everyone’s situation is different. There’s no one size fits all. A good adviser will be able to tell you whether it’s worthwhile and also identify the opportunities, you know, some of the opportunities that we’ve talked about today.’
If you are interested in hearing more from Richard, you can catch up on our tax series from back in December, which covered key details such as allowable expenses, holding structures and tax planning opportunities – all useful info to have!
Getting your business in the correct structure is vital. But sometimes, you must focus on the actual property itself.
There are over 6,000 landlords regularly chatting on the Mashroom Landlord Community Facebook page, sharing queries and questions. We’re delighted to welcome Mashroom Show regular Property Tribe’s Vanessa Warwick, who joined us to answer some of your burning questions.
One of the key themes that keeps popping up is around dealing with tenant damage, and when wear and tear tips over into something more. Can you shed any light on how to navigate this?
If a tenant raises a deposit dispute with the landlord, if the landlord is claiming that something is damaged and not fair wear and tear, then it’s really down to the independent adjudicator at the dispute resolution for the deposit scheme.
‘I think the key thing which we always stress is to have a very clear inventory at the start of the tenancy with photographs, preferably even video as well. That really sets a mark in the sand as to the standard of the property when the tenant took possession of it. When they leave, then you should have an out-going inventory done as well. That will show if there has been any damage. And it makes it a lot easier for the adjudicator to determine whether it is fair wear and tear or if it is quite significant.’
Maintaining landlord-tenant relationships
Hopefully, of course you won’t have to get to the stage where there is anything wrong with the property – regardless of who’s to blame – which causes an adjudicator to get involved.
One way to ensure that your inventory looks as similar at the end of the tenancy as it does at the start is to ensure that maintenance is kept on top of. Of course, this requires a good working relationship between you and your tenant, so how can you help keep this moving along?
‘I’m a big fan of midterm property inspections and I would recommend having your first inspection done within three months of the tenant moving in just to see how they’re settling in and then thereafter property maybe twice a year max just to keep checking in to see how the tenant is living in the property,’ suggests Vanessa.
‘I think if you have a midterm property inspection and you see something that is clear damage then again, it boils down to good relations between landlord and tenant. Hopefully, you’re maintaining them! An open and honest conversation with the tenant saying, “You know, unfortunately this looks like there is damage here, do you know how was it caused? We are going to have to replace that, and you know, it will come out of your deposit”.
Mid-term inspections sound like a logical idea, but is there anything you need to consider before you schedule them? Everyone understands that you need to request access with plenty of notice from your tenant, and they are perfectly within their right to refuse you access to the property, but this does somewhat throw a spanner in the works – is there any way around it?
‘There are many legitimate reasons why a tenant wouldn’t allow access,’ said Vanessa. ‘Some that spring to mind may be that maybe that they’re a shift worker and they have to sleep during the day, or maybe they’ve got a new baby and they don’t want to be disturbed. Maybe they’ve had some kind of bereavement or personal crisis. There are many legitimate reasons why a tenant wouldn’t want to allow access.’
‘The thing for the landlord to do if the tenant continually refuses access is to make sure they’ve got it documented via a paper trail whether that be via email, letter or text message. It’s very important to have that particularly if the tenant is refusing access for compliance issues like a gas safety check or something of that nature’.
One of the hottest topics on the Mashroom Facebook page is around the upcoming changes to Section 21, and people are sharing their thoughts on whether it will prompt a mass exit of landlords from the sector. But is it likely to be as drastic as we are all fearing?
‘I’ve been a landlord since 1992, and I think it is the most challenging conditions that I’ve ever experienced as a landlord with everything kind of coming together almost like a perfect storm’, admits Vanessa.
It’s very gratifying to see that so many politicians are now speaking out against Section 24 and the abolishment of Section 21. A Labour MP has spoken out against Section 24 as well, which is virtually unheard of because Labour have even more draconian policies than the Conservatives do.
‘I still believe in property as an investment. I think for the man on the street, that may not understand more complex type of investing like stocks and shares – I mean, that’s like gobbly-gook! – most people have bought their own home. They understand the house buying process. And I think, too, for somebody that’s looking to create wealth. It will always be a good way to go.’
‘I mean, it’s bricks and mortar. It’s a tangible solid investment. We have high demand, not enough supply, so rents are extremely robust at the moment. I think if you buy right, get the right advice from the right sources like Mashroom, Property Tribes and the NRLA and you make sure that the deal stacks up, do your due diligence, get the right tax advice, and the right finance advice, you can make it work.’
So yes, I will always 100% support buy-to-let and it’s served me very well. It is a long-term investment though. Anybody coming into it, has got to be prepared to be in it for 20/25 years.
Latest Landlord News
House prices are falling
If you are looking to expand your portfolio, and you’re happy to be in it for the long run, there’s some good news on the horizon. New research from Nationwide has revealed that March saw a 3.1% drop in house prices, compared to the same period in 2022.
In addition to the annual drop, there was a drop of 0.8% from the previous month.
Spring is historically when we see green shoots of movement in the housing market, with buyers looking to make purchases. However, this is the seventh month in a row that there has been a drop in prices, which suggests that the cost-of-living crisis is overriding traditions.
Nationwide chief economist Robert Gardner has named last year’s mini-Budget as a possible cause, saying: ‘Activity has remained subdued – the number of mortgages approved for house purchase remained weak at 43,500 cases in February, almost 40% below the level prevailing a year ago.’
Prices have now dropped below their August 2022 peak, great news for buyers, not so much if you are looking to sell though.
Changes to EPC legislation
If you are looking to invest in property, one of the key pieces of paperwork you will need to check out is the property’s EPC. The minimum energy efficiency standards (MEES) allowed for rented properties are a minimum of an E rating on their Energy Performance Certificate (EPC), so an investment in a property with a lower rating could be a costly purchase.
Do bear in mind that this is set to change too. The rating was set to move up to a minimum of C for newly-let rentals by 2025 (a deadline which is coming up really quickly!), however there is news on that front. The Daily Telegraph recently reported that the date may be being pushed back to 2028.
If this is proved to be true, it is excellent news for landlords. When the Department for Energy Security and Net Zero suggested 2025 for newly-let rentals to hit the C rating, and 2028 for all other rented properties, there was much concern about how such a huge leap would be achievable for landlords.
We tackled the issue in a recent webinar with expert James Tanner and discussed the ways you could go about improving your property’s energy efficiency, all of which still stand, however having another few years to spread the cost and carry out works makes life significantly easier.
However, it’s not all good news (of course!). Despite the potential respite, it has been reported that ministers are considering fines of up to £30,000 for landlords who fail to upgrade their properties by 2028.
Here at Mashroom we’re really lucky to have a brilliant team who really know their rental onions. Today, we’re joined by Emi Steadman, one of our fab landlord product specialists.
With portfolio structuring in mind, we caught up with Emi to discuss the key moves landlords can make to save themselves a pretty penny, however they choose to structure their businesses.
What are the key products that landlords are investing in currently, and why?
‘Well, rents are rising, which is obviously a good thing because it means more money. However, the thing that you need to be thinking about with that is, I’m putting up the rent, but can my tenants afford to pay that? With the cost-of-living crisis as well, we are seeing a lot more tenants defaulting on rent payments, more than we ever have before. So, I think now is the prime time to get yourself protected and invest in the right insurances,’ explained Emi.
The questions that landlords need to be asking themselves now is, if my tenant defaults on their rent, can I afford to cover that? If my boiler breaks down, can I afford to cover that. If I have a burst pipe, can I afford to cover that? And if the answer is no, then you need to look into getting the right insurances. In fairness, if the answer is yes, then you don’t really want to have to pay that out anyway!
With more tenants defaulting than ever before, are insurances not becoming less affordable? Surely the premiums will shoot up?
‘Here at Mashroom we’ve got our 5% package, which is 5% of your rental income. What that includes is guaranteed rent with renter’s insurance. Your emergency is covered with home emergency insurance, and £25,000 of legal cover as well,’ explained Emi.
‘I would also suggest for landlords to look into our deposit replacement option as well. It’s becoming more and more popular, especially now with the economic crisis and the cost-of-living crisis.’
‘The tenant pays one weeks’ worth of rent rather than the standard five, and the landlord has up to 12 weeks’ worth of cover. It’s advantageous for the tenant because they don’t need to be spending all that money up front, but it’s also advantageous for the landlord because you’ve got up to 12 weeks’ worth of cover, more than double that you’d get with the standard deposit.’
The next episode of the Mashroom Show is airing on the 21st April, where we’ll be catching up with Richard again to delve a little deeper into some of the most common tax issues. You can’t afford to miss this one, so make sure to pop the date in your diary.
In the meantime, why not head over to the Mashroom Landlord Community on Facebook and join the conversation about the show, or air your views! We’re all chatting, and we’d love to hear your thoughts.